"As recently as the late 1990s, potential growth in the
U.S. was estimated to be around 3.5%; by our estimates that
figure has recently fallen by half, to 1.75%," said
Feroli.

In a lengthy research note, he noted that 1) the growth of
America's workforce is slowing and 2) the productivity levels of
that population are deteriorating.

Regarding that first point, it has been well-telegraphed via the
labor force participation rate that the working-age population
has been declining. But an underappreciated negative force has
been the trends in migration.

"A key influence
here has been an estimated slowdown in net migration, both legal
and illegal," said Feroli. "Reduced net migration reflects
heightened security concerns since the September 11 attacks, and
the effect of soft labor markets."

Here's what Art Cashin, UBS Financial Services director of NYSE
floor operations said in a note earlier this week:

...Some folks point to a dysfunctional Washington. Others
see structural changes and challenges in key areas like
employment. A few shrug and say it is just history
reasserting itself. Most of the latter cite a year old
paper by Professional Robert J. Gordon of Northwestern
University. Professor Gordon maintains that, for
much of human history, economic growth and improvement has been
incrementally slow – somewhere in the range of GDP per capita,
growing at about 0.2% per year. His work indicates we may
revert to 0.5% growth for many decades to come.

Here is how Professor Gordon begins his thesis in the abstract to
his paper ("Is U.S. Economic Growth Over? Faltering Innovation
Confronts The Six Headwinds" {August 2012})

This paper raises basic questions about the process of economic
growth. It questions the assumption, nearly universal since
Solow’s seminal contributions of the 1950s, that economic growth
is a continuous process that will persist forever. There was
virtually no growth before 1750, and thus there is no guarantee
that growth will continue indefinitely. Rather, the paper
suggests that the rapid progress made over the past 250 years
could well turn out to be a unique episode in human history. The
paper is only about the United States and views the future from
2007 while pretending that the financial crisis did not happen.
Its point of departure is growth in per-capita real GDP in the
frontier country since 1300, the U.K. until 1906 and the U.S.
afterwards. Growth in this frontier gradually accelerated after
1750, reached a peak in the middle of the 20th century, and has
been slowing down since. The paper is about “how much further
could the frontier growth rate decline?”

The analysis links periods of slow and rapid growth to the timing
of the three industrial revolutions (IR’s), that is, IR #1
(steam, railroads) from 1750 to 1830; IR #2 (electricity,
internal combustion engine, running water, indoor toilets,
communications, entertainment, chemicals, petroleum) from 1870 to
1900; and IR #3 (computers, the web, mobile phones) from 1960 to
present. It provides evidence that IR #2 was more important than
the others and was largely responsible for 80 years of relatively
rapid productivity growth between 1890 and 1972. Once the
spin-off inventions from IR #2 (airplanes, air conditioning,
interstate highways) had run their course, productivity growth
during 1972-96 was much slower than before. In contrast, IR #3
created only a short-lived growth revival between 1996 and 2004.
Many of the original and spin-off inventions of IR #2 could
happen only once – urbanization, transportation speed, the
freedom of females from the drudgery of carrying tons of water
per year, and the role of central heating and air conditioning in
achieving a year-round constant temperature.

In a follow-up note on Friday, Cashin showed that the slow-growth
thesis was going more mainstream:

...One friend sent along an article from New York Magazine
(nymag.com) that had this very downbeat paragraph:

Gordon has two predictions to offer, the first of which is about
the near future. For at least the next fifteen years or so,
Gordon argues, our economy will grow at less than half the rate
it has averaged since the late-nineteenth century because of a
set of structural headwinds that Gordon believes will be even
more severe than most other economists do: the aging of the
American population; the stagnation in educational achievement;
the fiscal tightening to fix our public and private debt; the
costs of health care and energy; the pressures of globalization
and growing inequality. Over the past year, some other economists
who once agreed with Gordon — most prominently Tyler Cowen of
George Mason University — have taken note of the recent
discoveries of abundant natural-gas reserves in the United
States, and of the tentative deflation of health-care costs, and
softened their pessimism. But to Gordon these are small
corrections that leave the basic story unchanged. He believes we
can no longer expect to double our standard of living in one
generation; it will now take at least two. The common
expectations that your children will attend college even if you
haven’t, in other words, or will have twice as rich a life, in
this view no longer look realistic. Some of these hopes are
already outdated: The generation of Americans now in their
twenties is the first to not be significantly better educated
than their parents. If Gordon is right, then for all but the
wealthiest one percent of Americans, the rate of improvement in
the standard of living — year over year, and generation after
generation — will be no faster than it was during the dark ages.

The article also interviewed several economists who differ with
or contest Gordon's thesis. Interestingly, none seems to
foresee an unalloyed Utopian future. (E.g. one says that
the kind of work done by 65% of us could be done by robots.
Turn the lights down, HAL.)

All of this is pretty gloomy.

On the bright side, it's worth noting that some of the most
important productivity-increasing innovations in history came out
of nowhere. Think about the internet.